OPUS 4 Latest Documents RSS FeedLatest documentshttp://publikationen.ub.uni-frankfurt.de/index/index/
Tue, 16 Dec 2014 17:22:45 +0100Tue, 16 Dec 2014 17:22:45 +0100Are rules and boundaries sufficient to limit harmful central bank discretion? Lessons from Europehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36109
Marvin Goodfriend’s (2014) insightful, informative and provocative work explains concisely and convincingly why the Fed needs rules and boundaries. This paper reviews the broader institutional design problem regarding the effectiveness of the central bank in practice and confirms the need for rules and boundaries. The framework proposed for improving the Fed incorporates key elements that have already been adopted in the European Union. The case of ELA provision by the ECB and the Central Bank of Cyprus to Marfin-Laiki Bank during the crisis, however, suggests that the existence of rules and boundaries may not be enough to limit harmful discretion. During a crisis, novel interpretations of the legal authority of the central bank may be introduced to create a grey area that might be exploited to justify harmful discretionary decisions even in the presence of rules and boundaries. This raises the question how to ensure that rules and boundaries are respected in practiceAthanasios Orphanidesworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/36109Tue, 16 Dec 2014 17:22:45 +0100What happened in Cyprus? The economic consequences of the last communist government in Europehttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34319
This paper reviews developments in the Cypriot economy following the introduction of the euro on 1 January 2008 and leading to the economic collapse of the island five years later. The main cause of the collapse is identified with the election of a communist government in February 2008, within two months of the introduction of the euro, and its subsequent choices for action and inaction on economic policy matters. The government allowed a rapid deterioration of public finances, and despite repeated warnings, damaged the country's creditworthiness and lost market access in May 2011. The destruction of the island's largest power station in July 2011 subsequently threw the economy into recession. Together with the intensification of the euro area crisis in the summer and fall of 2011, these events weakened the banking system which was vulnerable due to its exposure in Greece. Rather than deal with its fiscal crisis, the government secured a loan from the Russian government that allowed it to postpone action until after the February 2013 election. Rather than protect the banking system, losses were imposed on banks and a campaign against them was coordinated and used as a platform by the communist party for the February 2013 election. The strategy succeeded in delaying resolution of the crisis and avoiding short-term political cost for the communist party before the election, but also in precipitating a catastrophe right after the election.Athanasios Orphanidesworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34319Tue, 08 Jul 2014 16:25:16 +0200Is monetary policy overburdened?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33199
Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness to preserve price stability and contribute to crisis management.Athanasios Orphanidesworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33199Mon, 03 Mar 2014 13:39:37 +0100What happened in Cyprushttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29483
This policy letter sheds light on the economic and political backround in Cyprus and provides an analyses of the factors which lead to an intensification of the crisis there. It discusses the severe consequences of the errors made in the recent establishment of an adjustment program for Cyprus by the Europroup for European economic management as a whole.Athanasios Orphanidesworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29483Wed, 04 Sep 2013 16:12:07 +0200Complexity and monetary policyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26870
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.Athanasios Orphanides; Volker Wielandworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26870Wed, 07 Nov 2012 16:24:57 +0100Complexity and monetary policy : [Version August 10, 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/27254
The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.Athanasios Orphanides; Volker Wielandworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/27254Thu, 18 Oct 2012 14:03:15 +0200Economic projections and rules-of-thumb for monetary policyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5741
Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers "forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers" own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC´s own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections.Athanasios Orphanides; Volker Wielandworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5741Fri, 08 Aug 2008 08:24:59 +0200A quantitative exploration of the opportunistic approach to disinflationhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4056
Under a conventional policy rule, a central bank adjusts its policy rate linearly according to the gap between inflation and its target, and the gap between output and its potential. Under "the opportunistic approach to disinflation" a central bank controls inflation aggressively when inflation is far from its target, but concentrates more on output stabilization when inflation is close to its target, allowing supply shocks and unforeseen fluctuations in aggregate demand to move inflation within a certain band. We use stochastic simulations of a small-scale rational expectations model to contrast the behavior of output and inflation under opportunistic and linear rules. Klassifikation: E31, E52, E58, E61. July, 2005.Yunus Aksoy; Athanasios Orphanides; David Small; Volker Wieland; David Wilcoxworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4056Mon, 05 Sep 2005 16:35:05 +0200The reform of october 1979: how it happened and whyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4418
This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC's adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed. JEL Klassifikation: E52, E58, E61, E65. David E. Lindsey; Athanasios Orphanides; Robert H. Rascheworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4418Mon, 13 Jun 2005 09:37:52 +0200The decline of activist stabilization policy : natural rate misperceptions, learning, and expectationshttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4416
We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted heretofore quiescent in inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, in inflation expectations would have remained anchored and the stag inflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both in inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy.Athanasios Orphanides; John C. Williamsworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4416Mon, 13 Jun 2005 09:37:31 +0200Imperfect knowledge, inflation expectations, and monetary policyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4443
This paper investigates the role that imperfect knowledge about the structure of the economy plays in the formation of expectations, macroeconomic dynamics, and the efficient formulation of monetary policy. Economic agents rely on an adaptive learning technology to form expectations and to update continuously their beliefs regarding the dynamic structure of the economy based on incoming data. The process of perpetual learning introduces an additional layer of dynamic interaction between monetary policy and economic outcomes. We find that policies that would be efficient under rational expectations can perform poorly when knowledge is imperfect. In particular, policies that fail to maintain tight control over inflation are prone to episodes in which the public's expectations of inflation become uncoupled from the policy objective and stagflation results, in a pattern similar to that experienced in the United States during the 1970s. Our results highlight the value of effective communication of a central bank's inflation objective and of continued vigilance against inflation in anchoring inflation expectations and fostering macroeconomic stability. July 2003.Athanasios Orphanides; John C. Williamsworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4443Mon, 13 Jun 2005 09:24:23 +0200Price stability and monetary policy effectiveness when nominal interest rates are bounded at zerohttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4481
This paper employs stochastic simulations of a small structural rational expectations model to investigate the consequences of the zero bound on nominal interest rates. We find that if the economy is subject to stochastic shocks similar in magnitude to those experienced in the U.S. over the 1980s and 1990s, the consequences of the zero bound are negligible for target inflation rates as low as 2 percent. However, the effects of the constraint are non-linear with respect to the inflation target and produce a quantitatively significant deterioration of the performance of the economy with targets between 0 and 1 percent. The variability of output increases significantly and that of inflation also rises somewhat. Also, we show that the asymmetry of the policy ineffectiveness induced by the zero bound generates a non-vertical long-run Phillips curve. Output falls increasingly short of potential with lower inflation targets.Günter Coenen; Athanasios Orphanides; Volker Wielandworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4481Mon, 13 Jun 2005 09:14:47 +0200Activist stabilization policy and inflation : the Taylor rule in the 1970shttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4488
A number of recent studies have suggested that activist stabilization policy rules responding to inflation and the output gap can attain simultaneously a low and stable rate of inflation as well as a high degree of economic stability. The foremost example of such a strategy is the policy rule proposed by Taylor (1993). In this paper, I demonstrate that the policy settings that would have been suggested by this rule during the 1970s, based on real-time data published by the U.S. Commerce Department, do not greatly differ from actual policy during this period. To the extent macroeconomic outcomes during this period are considered unfavorable, this raises questions regarding the usefulness of this strategy for monetary policy. To the extent the Taylor rule is believed to provide a reasonable guide to monetary policy, this finding raises questions regarding earlier critiques of monetary policy during the 1970s.Athanasios Orphanidesworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4488Mon, 13 Jun 2005 09:11:24 +0200